Debt Recovery by Lawsuit; Suing the Debtor; Using the Courts to Collect Past Due Balances

This essay is published for informational purposes only.  It is not legal advice, nor is it intended as a substitute for the advice of your attorney.

Collection litigation must be handled by an attorney unless the amount owed is small enough for a suit to be filed in Small Claims Court. A lawsuit should be filed only as a last resort and after all intermediate remedies have failed. The exact course the lawsuit will take depends on a number of variables. Probably the most important is the action taken by the debtor in response to the lawsuit.  Creditors hope that the debtor will not answer the Complaint, which can result in a default judgment in favor of the creditor.  However, the defendant (debtor) has a number of options. For example, the defendant may ask to have the complaint dismissed. It may seek a negotiated settlement. The debtor may file an answer to the complaint, or the debtor/defendant may file a counter-claim.

The actual steps in a lawsuit vary somewhat from jurisdiction to jurisdiction, but often follow a path such as the one described below:

1. A Complaint is filed in a court with appropriate jurisdiction. 

2. The debtor is served with the Complaint. 

3. Unless a Motion to Dismiss is filed and approved, the debtor must file an answer typically within 30 days of receiving the Complaint. 

4. If the debtor fails to respond, the creditor's attorney can ask the Court to enter a default judgment against the debtor. 

• In some jurisdictions, filing appropriate documents with the court is sufficient to request a Motion for a Default Judgment be entered.  Other jurisdictions require live testimony in which the creditor’s attorney will present proof that the complaint was served on the debtor, along with evidence of the indebtedness.  The Court may require witnesses, and interview those witnesses under oath
• If the Court is satisfied that all of the procedural steps have been taken and there is clear and convincing evidence that the debt exists, the court may grant a preliminary default judgment.
• After a specific period of time that may be different from state to state, the preliminary default judgment becomes final. Under unusual circumstances, a final default judgment can be set aside or vacated by the court.  Usually a default judgement is final meaning that the creditor has prevailed.

5. Assuming the defendant answers the complaint, the matter is placed on the Court calendar. 

6. Prior to the trial, the legal process called discovery takes place. During discovery, either party may submit written questions for information and documentation to the other party. Also, witnesses who can testify to the facts of the case are interviewed under oath in a deposition. 

7. At trial, the creditor will present evidence of the debt owed.  The debtor may challenge the evidence, or present facts in support of its counter-claim. 

8. At any time prior to a decision by the Court, the parties can agree a settlement. 

9. If the Court rules in favor of the creditor, a judgment will be entered and the debtor will be required to pay the debt. 

The credit department has an obligation before and during the case to monitor and to the extent possible to limit the costs associated with recovering the balance owed. The creditor should be prepared to recommend that the case be dropped if the costs outweigh the expected recovery.  Depending on the amount owed, the financial condition of the debtor company, the likelihood that the creditor will prevail at trial, and the legal and other costs associated with preparing for trial, it is not uncommon for a creditor to settle with the debtor out of court rather than to carry the process to trial and beyond.  One final note of caution:  Just because a creditor company has a court judgement against a debtor does not mean that the debtor can and will pay the money owed.  Obvioiusly, the law provides options to the creditor in this situation, but ultimately if the debtor company does not have the money to pay the creditor there is a limited amount the legal system can do to ensure that the creditor gets paid.

One final thought:  A debtor company’s credit standing can be seriously affected by a decision by even one creditor to file a lawsuit to collect an unpaid debt.  Filing a lawsuit is a matter of public record, something debtor companies normally try to avoid.  Sometimes the threat of a lawsuit or notice that a lawsuit has been filed is enough to convince a delinquent debtor to pay the balance due.

Edited by Michael C. Dennis.  Mr. Dennis is the author of several books relating to credit risk management and commercial collections.  He can be reached by email with questions or comments at:  michaelcolindennis@gmail.com